Greek Banks Tumble as Italian Contagion Adds to Capital Concerns

Greek Banks Tumble as Italian Contagion Adds to Capital Concerns

Eurobank Ergasias drops up to 14.4 percent in Athens trading. Bad-loan plan could fall afoul of European rules, Fitch says

Greek banks slid as contagion from Italy exacerbated concerns they’ll need to raise more capital to deal with their mountains of bad loans.

The FTSE/Athex Bank Index was down 5.4 percent at 1:54 p.m. in Athens, having earlier fallen as much as 7.9 percent. Eurobank Ergasias SA tumbled as much as 14.4 percent before paring its losses to 8.9 percent, while Piraeus Bank dropped 10.8 percent, having earlier fallen 13.6 percent.

Greek banks have fallen more than 40 percent this year amid doubts they can clean up their balance sheets fast enough, as supervisors pressure them to cut their bad-debt holdings. They have also been hurt by bearish market sentiment emanating from Italy, where the government is embroiled in a standoff with the European Commission over how big a budget deficit it can run.

The drop on Monday was the fourth decline in the last five trading sessions. Banks rallied on Thursday after Bloomberg News reported the country is weighing a plan to let lenders unload bad loans into a special purpose vehicle, though that plan could run afoul of European Commission state-aid rules, according to Fitch Ratings.

“The sector’s profitability is under pressure and progress on reducing non-performing loans has been slow,” Fitch analysts wrote in a note on Monday. “Uncertainty as to how the Greek government will support the sector and whether the solution would involve private investor losses will weigh on investor sentiment, and lead to higher external financing costs.”

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